In one of the most high-profile signs so far that foreign capital is swooping in on distressed US property, China's $300bn (€226bn) sovereign wealth fund is in advanced talks with Harvard University's endowment to buy the university's stakes in half a dozen US-focussed real estate funds for about $500m, according to people familiar with the matter.

The potential deal reflects a broader push by China Investment Corp., or CIC, to deploy its capital after staying largely on the sidelines amid the global financial crisis. With more capital available than any other investor in the world, CIC has increased the proportion of assets allocated to higher-risk assets.

The move also contrasts with the retreat from commercial real estate by many American institutional investors, like Harvard, that are struggling with large investments made in the sector during the boom years. The transaction is expected to close in the next couple of months, though it could still fall apart as terms haven't been finalised, these people say.

Representatives at CIC and Harvard declined to comment.

CIC is looking to boost its exposure to US real estate, and the fund is hoping to learn from the mistakes of other foreign investors who were clobbered by political and financial repercussions from their acquisitions of US property. For example, there was an enormous backlash against the Japanese two decades ago, when investors from that country purchased such American trophies as Rockefeller Center and the Pebble Beach golf course in California.

To limit the public relations and political fallout, CIC has targetted investment funds rather than specific properties partly to avoid such a stigma.

Besides negotiating with Harvard, CIC recently made a $1bn commitment to US real estate funds managed by Brookfield Asset Management, headquartered in both Toronto and New York, and a $1bn commitment to Cornerstone Real Estate Advisers, of Hartford, Conn., according to people familiar with the matter. Representatives at Brookfield and Cornerstone declined to comment.

CIC also is hoping to avoid the mistake made by the Japanese investors and others of overpaying for US real estate. Commercial property today is particularly appealing to foreign investors because values are hovering around 20-year lows, and more than $1 trillion of property debt is scheduled to mature in the next five years. That is causing huge headaches for US landlords and creditors, but it means opportunities for cash-rich investors looking to fill funding needs and rack up handsome returns.

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Harvard's real estate portfolio had a loss of more than 50% in the year that ended in June 2009, according to the latest available performance report by Harvard Management, which oversees the endowment. Since 2009, the $26bn Harvard endowment, the largest of any major US college, has been trying to pare down its $5.4bn real estate portfolio as it seeks to cut its exposure to illiquid assets like real estate.

The fund's aggressive push into these asset classes left it without enough cash to meet its obligations when the financial crisis erupted two years ago.

Harvard has tapped bankers at Morgan Stanley and Credit Suisse to try to sell its partnership interests in a number of real estate funds, people with knowledge of the situation said. Representatives at both firms declined to comment. Some of the largest real estate commitments Harvard has made are with fund managers, including Lubert-Adler, Beacon Capital Partners and Westbrook Partners, the people said.

Other foreign investors also are looking to take advantage of low values in US real estate. In the second quarter, investors from Canada, South Korea, Netherlands, Kuwait and other countries acquired about $2.2bn of skyscrapers and other properties in the US, more than five times the amount seen a year earlier, according to research firm Real Capital Analytics.

For instance, a group of investors, including Korean Federation of Community Credit Cooperatives, paid $333m for a 655,398-square-foot, fully leased office building at 333 Market St. in San Francisco's financial district. In another large deal, CPP Investment Board, which invests on behalf of the Canadian Pension Plan, paid $576m for a 45% interest in the 1.6 million square foot McGraw-Hill Building, at 1221 Ave. of the Americas in Manhattan.

To be sure, the current inflow of foreign capital still pales in comparison with the levels seen from 2003 to early 2008. For example, overseas investments totaled about $8.7bn in the third quarter of 2007 alone, the peak of the property market.

But the woes in the US marketplace might work in favor of CIC and other foreign investors. US real-estate executives are lobbying Congress to amend tax law to encourage overseas capital to flow into US real estate, thus helping prevent a further decline in commercial property values. In the early 1980s, Congress approved a tax on capital gains from foreign sales of US property to discourage foreign investment.

It is unclear how much CIC intends to allocate to US real estate. CIC issued its second ever annual report but didn't say how large a role property investment plays in its portfolio.

Michael McCormack, an executive director at Z-Ben Advisors, a consulting firm in Shanghai, estimates that less than $5bn, or 5%, of the fund's global portfolio is invested in real estate.

People familiar with the situation say that CIC's funds have been almost fully invested and that it has applied to Beijing for a capital injection. At the end of last year, it had about $332.4bn of assets under management, of which only $16.4bn was held in cash and deposits, down more than 70% from a year earlier. About $81.1bn of CIC's funds were invested outside China at the end of 2009. CIC posted an 11.7% return on its overseas investments last year, reversing a 2.1% decline in 2008.

McCormack says that assuming CIC gets allocated a further $100bn, he expects it to invest an additional $10 bn to $15bn in property over the next 18 months. Real estate funds are "a good bet when you need to make big investment and yet still stay under the radar," he says.

Write to Lingling Wei at lingling.wei@wsj.com and Dinny McMahon at dinny.mcmahon@wsj.com